It’s Domainfax crucifiction! Since its parent had the temerity to forecast a property crash (didn’t Sixty Minutes get the Domain memo?) it’s gone on the attack with a piece in which “experts rubbish” crash claims:
Experts have questioned claims of a 40 per cent drop in Australia’s house prices, made over the weekend on 60 Minutes.
Martin North, the founder of Digital Finance Analytics, said ballooning household debt, compounded by sliding prices in Sydney and Melbourne, would cause house prices to fall fall 40 to 45 per cent in the next 12 months.
“We’ve got a debt bomb a debt crisis and at some point it’s going to explode in our face,” he said.
Louis Christopher is ducking for cover:
Note: I DO NOT believe the Australian housing market is going to crash. Syd & Melb are significantly overvalued but I take the view the overvaluation will likely unwind over a longer period of time. #60minutes 1/
Anyway, I think I have said what I wanted to say here. It was largely the @DFA_Analyst show afterall! 45% down the next 12 months?! Ok, over to you, Martin!
My open letter and offer to DFA’s Martin North – Skin in the game on house prices
I have sent this to Martin North, founding Principal, Digital Financial Analytics.
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Dear Martin
Congratulations on your cameo on the TV program 60 Minutes. It was gripping viewing and a quite fantastic story.
I note with a huge amount of interest your forecast for property prices to fall by “40 to 45 per cent”.
It is a big call and certainly grabbed the attention of many in the public.
I note also that on your blog, you suggest the quote which included that forecast was not given the context you attached to it, namely, you rated it “only a 20 per cent chance” and that the 40 to 45 per cent price fall would be “over 3 years or so”.
That context is important.
Over the many years I have been making forecasts for the economy and markets and seeing others do the same, I find that forecasts without any skin in the game are often compromised. It is easy to construct a headline grabbing forecast for a significant move in markets, including house prices for example, but when they fade into oblivion, there are no implications for the forecaster. Forecasts really only has validity if the forecaster has an interest in the forecast being correct.
In other words, would the forecaster really make that forecast if they put their money where their mouth is?
To that end, I would like to offer you the following wager:
I will offer 6 to 1 ($15,000 to $2,500) that Sydney or Melbourne or national wide house prices will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021. The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.
This means that if, at any stage the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give you $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne or the eight capital cities, you have to give me $2,500.
How is that for generous and a wonderful chance to leverage your forecast into some cold hard cash?
Not only am I offering very generous odds (6 to 1 which is above your 5 to 1 probability), but I am tapering your forecast by a massive 5 to 10 per cent from the 40 to 45 per cent fall you were forecasting on the 60 Minutes program (prices only need to fall 35 per cent) and I am offering three possible markets for that to occur (either Sydney, Melbourne or the eight capital cities measure) and for the peak to trough being around 4 years, not the 3 years you suggest.
As an additional bet over and above that offering, I will offer 2 to 1 ($20,000 to $10,000) that at no stage from the peak in prices and the December quarter 2021, Sydney or Melbourne or national wide prices drop more than 22.5 per cent. That is a very generous 2 to 1 for a fall of just half of your forecast decline. If at any stage dwelling prices fall by 22.5 per cent or more, you collect $20,000, if they don’t you pay me $10,000.
How is that for amazingly generous odds and for you to have a great return even if you are half right?
The June quarter 2018 residential price series is released this week (18 September 2018) which will not change my offer but will add a little bit more information on the extent of the current price down turn.
This offer is open until 5.00pm, Canberra time, Friday 28 September 2018.
I look forward to hearing from you.
I will make the details of this offer and your response to it public as an additional part of establishing our credibility in the all important forecasting space.
Kind regards
Stephen Koukoulas
But to no avail:
Unfortunately, Martin has rejected my very generous offer
My open letter and offer to DFA’s Martin North – Skin in the game on house prices https://t.co/5on4A0W9X8
Hi Stephen, thanks for your message. I appreciate the offer. However, I do not make bets, ever. A point of principle.
However, an alternative offer. Would you care to participate in a discussion on the subject of home prices, and where they may go – for my YouTube Channel? I have had Steve Keen on among others, but so far have not been able to get a coherent point of view around why prices will not fall as far or as fast. I would love to present a balanced set of discussions. I am of course data driven. My genuine wish is to foster open debate, not peddle a specific viewpoint.
As you say, context is everything, and my scenario 4 – which is the one 60 minutes went with was predicated on the assumption that the US economy would flag (inverted yield curve and all) and this would lead to a global fall, throttling interbank lending, etc. etc.
I rate it 20%, and it is not my central scenario. My best call would be in the region of 15-20% from top, over 2-3 years, but with some risk of a worse outcome. Nine chose not to cover these alternatives, though I went through each in the recording… I believe 2019 will be the critical testing year one way or the other.
If this would be of interest, I can record via Skype, so it would be easy to set up. Let me know….
Anyhow, I appreciate your taking the time to message me, and we could certainly discuss your offer and my reasons why I did not take it up, during the show, if you like.
I’ll add my best guess to the pet shop. -15% on local forces over the next two years followed by another -15% owing an external shock beginning in late 2020. The odds of this are much higher than 20%.
That’s near enough to -40% real by the time it’s done.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
